Mortgage-backed securities caused a major financial crisis three years ago. The low-rate environment that followed the bursting of the Internet bubble, combined with lax mortgage practices by a historically strict group, fueled the ballistic rise of MBSs.
The collapse of MBSs, and the many synthetic investments derived from them, brought down almost everything else-- including interest rates. Now, the companies that hold these securitized mortgages occupy the highest yielding corner of the U.S. equity markets.
There are many REITs that manage portfolios of these securitized mortgages. These mREITs have recently been hit by a series of fears beyond the concern that foreclosures will continue for the coming years and that housing prices may continue to drop.
Mortgage REIT risk has been fortified by the growing fear of regulatory changes and the looming risks associated with rising interest rates. New potential regulatory risks also include issues of tax status and leverage.
The following is a performance comparison of seven of the highest-yielding mREITs that have reasonably large trading volumes (averaging over 1 million shares per day). The list includes agency mREITs Annaly Capital Management (NLY), American Capital Agency (AGNC), Capstead Mortgage (CMO) and Hatteras Financial (HTS), and non-agency / hybrid mREITs Chimera Investment Corporation (CIM), Invesco Mortgage Capital (IVR) and MFA Financial (MFA). I have provided their yields as well as their 5-day (1-week), 1-month and 3-month performance rates:
These mREITs offer significant yield and some real and understandable property-related risks. Exposure to either agency or non-agency mREITs should be limited to a reasonable percentage of a portfolio, based upon your risk profile, time-horizon and other investments.
Additionally, most REIT dividends are taxed as regular income and not at the lower corporate dividend rate, making them substantially better performing investments when held within tax deferred or exempt accounts.
Disclosure: I am long NLY, CIM.
Disclaimer: This article is intended to be informative and should not be construed as personalized advice as it does not take into account your specific situation or objectives.